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Inflation discussion Part II / Housing / Europe / Asia

United States

Yesterday, only hours after I whined over how the Fed and other central bankers view inflation (not appreciating at all the dramatic impact the internet has had on their old school inflation models) and are still worried about the current low levels, I saw this news from S&P CoreLogic on home prices in March…

For 20 cities surveyed, prices were higher by 5.9% y/o/y, the fastest pace since July 2014. Wow, if you own a home that is great news. If you are looking to buy of course, it sucks. Yes, low mortgage rates will cushion your monthly payments but should home prices keep rising at such a steady clip, more than double the rate of the so called consumer price index? It really sucks if you happen to be searching for a home in Seattle as prices there in March were higher by 12.3% y/o/y. The Chinese certainly love it there. Portland you say, pay up by 9.2% vs last year. You like Dallas because of no state income taxes, bam, prices are 8.6% more expensive y/o/y. You like Denver because of its new booming industry? Prices are up 8.4% y/o/y. Where was the bargain you ask? NY, where prices were up ‘only’ 4.1% y/o/y.

About 5 hours later we heard from Fed Governor Lael Brainard, a noted dove on the committee. She however definitely wants to raise rates again due to the “labor market continuing to strengthen, and GDP growth expected to rebound in the second quarter.” But, she is still hung up on this inflation issue and said the inability to get to the 2% target (using the PCE) is “a source of concern” and “if the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy.” In other words, she doesn’t like those bargains you are finding online.

So we have again persistent asset price inflation in the biggest purchase most Americans will ever make in their lifetime (I’m not going to get into the massive asset price inflation in stocks, bonds, antique cars, art, etc…) and are told that not getting to 2% in the inflation consumers pay as measured by the PCE is “a source of concern.” Why does this ignorance of other inflation outside of the PCE matter? On Thursday, Apartment List, a rental listing company released a survey and I’ll quote the WSJ on what the results were: “Nearly 70% of young people ages 18-34 years old said they have saved less than $1,000 for a down payment… About 40% said they aren’t saving anything monthly. Even senior members of the group are falling short. Nearly 40% of older millenials, those age 25-34, who by historical measures should already own or be a few years away from homeownership, said they are saving nothing for a down payment each month.” Herein lies a big problem with these persistent 5-6% price increases which on an average $300,000 home is an added $15-18k per year in cost which implies, if 20% is the down payment requirement, an extra $3-4k in cash is needed to buy a home if you’ve waited a year. Only about 2% income growth is needed to cover the higher monthly mortgage payment so the price hikes more impact the needed down payment.

And the millenials want to own a home one day. On the survey, the WSJ said “The vast majority, some 80%, of millenials said they eventually plan to buy a home. But 72% said the primary obstacle is that they can’t afford it.” Multi family housing will continue to be a beneficiary. While multi family rents are moderating in certain markets like NY and SF with too much supply and many units are under construction in other areas, I continue like the multi family secular story which with persistent rent increases in this space, is another form of inflation in the biggest cost of living that many others have (about 35% of households).

We’ve seen in the recent consumer confidence data that we’ve might have reached an inflection point on these home price gains as we’re at a multi year high in those that have said it’s a good time to sell a home while those that said it’s a good time to buy is shrinking. Well, today the MBA said purchase applications to buy a home fell 1.4% w/o/w and that is the 3rd week in a row of declines to a 5 week low. The positive was the pace of applications is still up 7% y/o/y but this starts to flatten out y/o/y over the next few months if it remains at current levels. Refi’s fell 5.6% w/o/w and are lower by 31% y/o/y. We see pending home sales at 10am.

Stock market sentiment cooled down further this week as II said Bulls fell 1.9 pts to 50 while Bears were up by .9 pts to 19.2. The 50 level is still considered “lofty” by II but is 10 pts below the “danger level” that they consider above 60. For perspective on Bears, it got as high as 39.8 in February of last year in the midst of that selloff. The Correction side was up by 1 pt. After Bulls reached its 30 yr high on March 1st, the majority of stocks have churned since.

Europe

In the eurozone, May CPI was higher by 1.4% y/o/y and up .9% at the core. Both were one tenth less than expected and down from 1.9% and 1.2% in April. Mario Draghi won’t like this but he actually presides over price stability as for the last three years when he first went down the rat hole of negative interest rates, core CPI has averaged .8% y/o/y. Price stability doesn’t have to equal 2%. The euro is actually higher on the miss while European yields are little changed. The 5 yr 5 yr euro inflation swap is also unchanged at 1.58%. It’s recent peak was 1.8% and bottomed at 1.25% post Brexit. It was about 2.10% when negative interest rates befell the European banking system. Also out was the April unemployment rate for the euro area which came in at 9.3%, down one tenth and is at the lowest level since March 2009. Since Eurostat has been publishing this figure since 1998, it has averaged 9.6%.

The German labor market saw a 9k person drop in unemployment in May which is the 14th straight month of declines but wasn’t as much as the 15k that was expected. Even so, the unemployment rate fell one tenth to 5.7% which is a new low post East and West German reunification while the German 10 yr bund yield sits at .295% and whose curve is negative out 8 years.

Asia

In Asia, South Korea reported a disappointing industrial production figure for April as it fell 2.2% m/o/m instead of rising by .6% as expected. The y/o/y gain slowed to 1.7% from 3.3% in March. There was a slowdown in semiconductor production and auto parts. A spokesman at Korea Statistics said there was slowing demand from China smartphone makers and we know there is slowing auto sales in the US. The gains were seen in machine equipment and electronic components helped by LED’s and LCD tv panels.

IP in Japan in April was higher by 4% m/o/m and 5.7%, both a touch below expectations. In stark contrast to the Korea news, auto production rebounded sharply from declines in March and also rose for semi’s. Go figure. The Nikkei was slightly lower while the yen and JGB’s were little changed.

The state sector weighted Chinese May manufacturing PMI saw no change m/o/m at 51.2 (matching the lowest since September) while the services PMI was up .5 pt to 54.5 off the lowest also since September. Within manufacturing, price pressures did ease while export orders are a hair above 50. Employment stayed below 50 while new orders were unchanged at 52.3. For services, new orders rose by .4 pts to 50.9 but employment fell .5 pt to 49. Backlogs were weak at 43.7. Price inflation also moderated. Bottom line, we can call the data stable but it also has slowed from Q1 as China continues to battle with trying to crack down on excessive credit growth at the same time they want to grow around 6.5% and also want stability ahead of the Fall Congress. Quite a bit of balls to juggle. The Shanghai index closed up .2% while the H share index was lower by .2%. After a run higher in interest rates across the board the last few months, they’ve quieted down recently.